Year’s end is rapidly approaching
By Robert Cantu
Published: December 27, 2014
Year’s end is rapidly approaching, but there are still some tax-advantaged moves you can make before the New Year. If you itemize deductions, you might prepay the next installment of your property taxes, pay off medical bills, and pay the fourth quarter state-estimated tax payment in advance. You might prepay college tuition to maximize education credits, and purchase business equipment to take advantage of the more beneficial write-offs available in 2013.
PREPAY NEXT INSTALLMENT OF PROPERTY TAXES - Usually, property taxes are billed in a fiscal year and can be paid all at once or in multiple installments. If you have been paying the current tax bill in installments and one of those installments is due in 2014, you can pay it before year’s end and take the deduction on your 2013 return instead of on 2014’s return
PAY STATE-ESTIMATED TAXES IN ADVANCE - If your state has a state income tax, the state income tax paid during the year is deductible as an itemized deduction on your federal tax return. The fourth quarter estimated installment for 2013 is due on January 15, 2014 for most states. If additional state income tax payments in 2013 can benefit you as an itemized deduction, paying that January installment before year’s end would allow it to be deducted in 2013.
Caution: Taxes are not deductible if you are subject to the alternative minimum tax, and prepaying state income and property taxes might not provide any benefit.
PAY OFF MEDICAL BILLS - If you are paying medical expenses on an installment plan, you itemize your deductions, and your medical expenses for 2013 will exceed 10% of your adjusted gross income (AGI), or 7.5% for tax filers aged 65 and over, it could be beneficial to pay off the balance you owe. You can pay off those medical expenses, even with borrowed funds, before year’s end and increase your deductions for 2013.
MAKE CHARITABLE CONTRIBUTIONS - The holiday season is historically a time for making charitable contributions to qualified organizations, and if you are itemizing your deductions, the donations you make before the end of 2013 can help to reduce your 2013 tax bite. If you regularly tithe to a house of worship, you might even prepay part of your 2014 commitment and deduct it in 2013. This can be beneficial for those who only marginally itemize their deductions.
Caution: Beginning in 2013, higher income taxpayers will have their itemized deductions phased out, so if you are subject to the phase-out, these planning suggestions may not provide the benefits expected. The income threshold for the phase-out is $300,000 for joint filers, $250,000 for singles, $275,000 for heads of household, and $150,000 for married individuals filing separately.
PREPAY COLLEGE TUITION - If qualified tuition is paid during 2013 for an academic period that begins during the first three months of 2014, the education credit is allowed for those expenses in 2013. Thus, if your higher-education tuition expenses for yourself, your spouse, or your dependents to date for 2013 have not been enough to maximize your education credit for 2013, you might consider prepaying the tuition for the first quarter of 2014
PURCHASE BUSINESS EQUIPMENT - If you have a business, and you anticipate purchasing additional equipment for the business, it may be appropriate to make the purchase(s) before the end of the year to take advantage of the bonus depreciation deduction and/or the Sec 179 expensing deduction. Equipment includes machinery, computer systems, communication systems, office furnishings, etc. Unless extended by Congress, the bonus depreciation will end after 2013, and the maximum Sec 179 deduction will decrease to $25,000 from the current $500,000.
Given the many regulations and nuances of the tax laws, many people opt to hire a licensed tax practitioner, such as an Enrolled Agent.
Robert Cantu is a Santa Paula Enrolled Agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. As a Director of the local chapter of the California Society of Enrolled Agents, he is actively involved in the tax profession at the local, state and national level.